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Deferred Tax Asset/Liability

Avadhut (Analyst) (53 Points)

26 June 2008

Hi,

1.Can anyone explain the term "Deferred Tax Asset/Liability" with an example?

2. When any company issues Secured Debentures. Do the investors have claim on company's assets for Principal+interest or only principal amount?

Many thanks

Avadhut

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7 Replies

S.Srinivasaraghavan (Chief Financial Officer and Co) (11318 Points)
Replied 26 June 2008

There may be difference how certain items of expenditure are treated for tax purposes and how a company actually treats them in its accounts. For example, tax laws allow a100 per cent depreciation in the year of acquisition of certain assets. But a company may actually write off the depreciation over a larger number of years in its accounts. In otherwords, the company may charge depreciation at lower rates than allowed under tax laws. Or it may use a different method of charging depreciation. Tax laws may allow a company to deduct certain expenses in full in a single year, but it may phase out the charge over a number of years. In these cases, a company ends up postponing part of its tax liability on this year's profits to future years. This is because, in the current year, its profits for tax purposes would be lower than the profits computed for accounting purposes. Under such circumstances Deferred tax liability arises. In exactly opposite circumstances where the tax is paid in excess but the expenditure is allowed subsequently, Deferred tax Asset results.

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Avadhut (Analyst) (53 Points)
Replied 26 June 2008

Thanks. Any reply for secured loan question?

CA Naveen Kumar Agrawal (Chartered Accountant / MBA) (939 Points)
Replied 27 June 2008

Investors have charge on Companies Property (in case of secured Debentures) to claim the Principal as well as Interest.

Dinesh (Service) (23 Points)
Replied 04 October 2008

Sir I have Little Bit of Confusion how the Deffered tax is charged to Profit and Loss account and how much portion of Leave Encashment is being shown for calculation leave encashment.

Regards,

Dinesh Mishra

(Guest)

Originally posted by :Avadhut
"	Hi, 1.Can anyone explain the term "Deferred Tax Asset/Liability" with an example? 2. When any company issues Secured Debentures. Do the investors have claim on company's assets for Principal+interest or only principal amount? Many thanks Avadhut	"

Radhika (Articleship) (110 Points)
Replied 25 October 2008

Hii, Hope from the above explanation you'd have understood what deferred tax asset and liability is. so in case of deferred tax asset, it means you have paid extra tax for which the benefit accrues in the future. For example, suppose an asset is depreciated at the rate of 25% as per Companies Act and 10% as per IT Act, then it maeans you can claim deduction only to the extent of IT depreciation, thereby your profit increases and you end up paying extra tax. For that extra tax paid now, the liability arises on the forthcoming years. So to the extent of increase in the profit is due to the lesser deduction of depreciation expense. so while creating DTA, P&La/c is credited and DTA is debited. In the forthcoming years reverse entry would be passed to write it off.

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